The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: aes421 on April 16, 2019, 11:20:56 AM
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Hi all,
I am finally in a place where I can max HSA, both 401ks and both Roth IRAs. Now I'm looking into a Mega Back Door Roth for the rest of it.
I can't quite figure out if my company supports it though. I know I can contribute after tax dollars because I accidentally went over last year.
When it comes to the roll over part the only option for in service withdrawal is to a traditional IRA. However, we do have an In-Service In-Plan Roth Conversion that will convert my money to a Roth 401k. I am able to specify that I want the money to be the After-tax portion (but it will be contribution + earnings still).
Will a Roth 401k still work for the mega back door roth?
One thing I am worried about is how do I access this money once I FIRE? I know with Roth IRA you can withdraw your contributions penalty free, but is that the same case with Roth 401k?
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#1 - an in-service Roth 401K conversion is nearly as good as in-service rollover/conversion to Roth IRA, so that's a non-issue in my mind.
If you make an unqualified withdrawal directly from the Roth 401K, then it will be prorated between basis and earnings, and you'll pay tax and penalty on the earnings portion. However, the fix is simple - roll the Roth 401K to a Roth IRA upon termination. The basis follows (make sure you have good records), and is treated as regular contributions to the Roth IRA or Roth conversions as the case may be on the original money.
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My employer offers the mega backdoor in this manner as well. In my case the 401(k) funds are institutional class Vanguard funds with lower expense ratios than Admiral funds, so it's even better to do this than roll over to an IRA. As dandarc says, plan to roll the money into a Roth IRA before you start withdrawing in order to take advantage of the more favorable withdrawal rules available in Roth IRAs.